The Misguided Promises of Proposition 87

The Misguided Promises of Proposition 87

People are increasingly frustrated with politics because too often candidates promise more than they can deliver. The proponents of Proposition 87 are guilty of the same thing, making big claims about the measure that in reality do not measure up.

Proposition 87’s proponents want to “make big oil pay for cleaner energy.” To do this, they are proposing raising taxes on oil producers by $4 billion and then creating an authority to spend that money on alternative energy projects. While it is tempting to want to increase taxes on oil companies, the problem is that consumers will bear the brunt of the increased taxes. Because the measure mandates that $4 billion be spent, taxpayers likely pick up the tab if the tax does not generate sufficient revenue. Supporters say that won’t happen, but since the tax is tied to the price of oil, falling prices will generate less money, leaving taxpayers holding the bag.

Proposition 87 tries to prohibit oil companies from passing on the price of the tax to consumers. There is little reason to believe that this will actually happen, unless California can suspend the laws of economics. Attorney General Bill Lockyear’s official summary of the proposal states that the prohibition against passing the tax on to consumers will be difficult to administer and economic factors will likely limit this prohibition. Why? Because Economics 101 teaches us that taxes have both direct and indirect costs. By raising taxes on oil producers, Proposition 87 makes oil produced in California more expensive. Since the price of crude oil is the largest factor in the price of gasoline at the pump, consumers will most likely bear the cost of the tax.

Increasing the price of domestic oil will lead to the use of more foreign oil, despite Proposition 87’s backers claim to the contrary. Increasing the price of domestic oil through additional taxation makes foreign oil more price-competitive.

That’s not the only economic problem with Proposition 87. According to Taxing Energy, a book recently published by the Independent Institute, a 6 percent tax on production, as Proposition 87 imposes, would reduce the remaining economic life of existing wells in California by three years and would reduce the remaining production of existing wells by 10.5 percent. The book’s authors note that the tax would reduce the number of new wells drilled in California by 6.5 to 7.0 percent. All of these factors point to less domestic oil production and more reliance on foreign sources of oil.

Proponents of Proposition 87 also claim that the measure will lead to “cleaner air, less asthma.” The problem with this claim is that as the air quality in California, and the rest of the country, has been getting cleaner, asthmas rates have risen; not fallen. From 1990 to 2005 in Los Angeles, ground level ozone fell by 33 percent, particulate matter (dust) fell by 36 percent, nitrogen oxides fell by 40 percent, carbon monoxide fell by 67 percent, and sulfur dioxide fell by 42 percent. There’s still work to do, but the air is getting cleaner, not dirtier. The causes of asthma are not well understood and not always attributable to outside air as factors such as genetics and indoor air quality play an important role. Linking asthma to higher energy taxes is a classic bait-and-switch, designed to tug on people’s heart stings and divert attention away from higher taxes and higher gas prices.

Proposition 87’s backers also claim that it will create jobs in California, but the immediate result of the Proposition will be lost jobs. The authors of Taxing Energy calculate that a 6 percent tax would eliminate between 1,700 and 2,600 jobs in the petroleum sector and a total of 9,000 to 16,000 jobs all told in California. The reason is simple—reduced economic activity in California because of high oil and gasoline prices that would cost an estimated $1.2 to $2.0 billion annually. This will quickly dwarf the effect of spending $4 billion under Proposition 87.

Lastly, despite the claims of Prop 87 supporters, billions of dollars are already being spent on alternative energy research, even without state mandates like Proposition 87. The American Petroleum Institute reports that oil and natural gas companies spent $98 billion between 2000 and 2005 on emerging technologies, including renewables, in North American alone.

The reality of Proposition 87 doesn’t measure up to the claims its backers make. Proposition 87 will increase the costs of gasoline to consumers, increase the amount of foreign oil used in the United States, and reduce domestic oil production.